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Germany's generosity

By Jonathan Chang
web posted October 27, 2014

Everybody loves to get free stuff. To be honest, there is nothing better than walking through Costco and eating an entire lunch off of free samples… Well, maybe free college tuition. Recently, Germany announced that they've completely eliminated the costs for attending any college within Germany. Any 18 year old or high school graduate can attend college at completely no cost to themselves. However, even as teenagers and young adults celebrate, it must be remembered that every major action has an effect on the aggregate economy. While it does have the obvious benefits, the abolishment of college prices and tuition has a surprising amount of negative effects in the market.

Before delving into the benefits and costs, we should see where the payments for tuition are coming from. In 2006 Germany's Constitutional Court ruled that universities could charge for tuition. It didn't take long for various states to start abolishing the increasingly unpopular act due to protests until Lower Saxony, the final state, abolished fees on October 1st. While students still have to pay for textbooks, rent, and housing, classes and admittance into colleges are completely covered by a third-party payer. The German government has taken on the entire cost burden and currently adds on more state subsidies to keep high education free. This is certain to raise Germany's already high tax burden of 49.8% even higher. Whatever economic effect this decision has, it should be known that the German government takes the brunt of the cost as the third-party payer behind it.

Germany's students are one of the consumers that benefit the most from the abolishment of costs. Without the high opportunity cost of college tuition, students can apply their money saved to other endeavors. One could start a small business, spend money on more leisurely things, and even invest into stocks. Free education also greatly benefits students that were smart enough to complete college, but never got a chance for the degree due to a lower livelihood and income. But the benefits don't stop only at local students. German universities are free for American students as well as all other international students. By enticing foreign students with free education, Germany can become more international and help stimulate local economies. Tourism is almost always a benefit to the economy and Germany can certainly capitalize on that by becoming as international as possible. In addition, by making education more accessible, Germany is growing its future capital and skilled labor pool. Studies have shown correlation between education and economic growth; a correlation Germany can certainly capitalize on with such accessible education. Finally, this program falls in line with Germany's overall social policy. Whether or not the "Social State" is a good form of government, synchronizing welfare and subsidy programs with the current culture is likely to boost nationalism and general happiness. After all, unrest from the people was the main driving factor that pushed Germany to completely abolish tuition costs. 

But for every up, there is always a down. The cons of subsidizing the higher education system are actually shockingly high and can come from unexpected places. Using only the law of supply and demand, a problem can clearly be seen already. Lowering the cost of college to a flat zero, ceteris paribus, will cause the demand to shoot up by an insane amount. Everyone will want a piece of the education pie now that it's being handed out for free. Such a quantity demanded is sure to cause a shortage making it harder for students to get their classes, rooms, textbooks, or even admittance! By attempting to make college more accessible, Germany actually made it harder for people to attend! Even out of college, graduates will experience shortages of job openings and opportunities. Since more people can obtain their degrees, the value of degrees will begin to go down as employers have a much higher labor pool to choose from.

With such a high demand for jobs, searching for employment can be a fruitless task even for a college graduate. In addition, since colleges are being paid a flat amount by the government, the higher education market loses valuable competition. Colleges are no longer concerned about sprucing up and bettering their campuses to entice students if they're just going to be paid no matter how much effort they put in. In fact, colleges will attempt get around the price ceiling and regain profits by raising textbook prices, cutting campus maintenance, and offering lower quality food.  Looking to America, colleges constantly bombard students with grants, scholarships, and information about their college hoping to bring them to their school as their profits depend on their effort. It is this desire for profit which drives the free market economy and ultimately causes colleges to constantly raise their standards and outmatch their competitors. But without the competition, German colleges have no reason to better themselves or offer unique services and opportunities to attract more students.

Finally, Germany's overall economy is likely to suffer from this move. While it is true the quality of human capital will increase by allowing for more education, Germany might not have enough production capabilities to make full use of such high quality labor. While scientists and mathematicians are important occupations in this day and age, a nation cannot function on science and math alone. There will always be people needed to run the machines, harvest the crops, and fulfill manual construction labor needed for everyday tasks. Therefore, if Germany does not have the production capabilities to employ the high education workers, it is essentially wasting the cost it spent supporting these people through college. The sociological effect cannot be ignored as well. While it cannot be clearly predicted like the law of supply and demand, higher education is sure to raise one's sense of self worth and entitlement. After all, who would want to go through college and obtain a graduate's degree only to be expected to work in the corn fields and maintain machines? In the end, when the scientists and English majors cannot find jobs in their fields due to shortages and are forced to work on the farm, their work will be of lower quality compared to the generations before them who spent their lives in the fields instead of in the classrooms. And while college may be free for the attendees, all these subsidies required to keep education free will begin to build up. As a very big proponent of social plans and welfare, Germany has the second highest income tax burden of all of the Organization of Economic Co-operation and Development's 34 countries (OECD). By adding free education to their already filled platter of programs, Germany tax of almost 50% is bound to rise.

While it may have seemed like a good idea on the surface, making higher education free only serves to create additional economic problems. Ultimately, there really is no such thing as a free college education. While it is unfortunate that tuition costs are dangerously high in America, trying to solve the problem in a socialistic way is never the answer. History has proven that removing the free market and competition to bring in communist and socialistic methods will ultimately serve to ruin the economy. Germany's actions further show how risky it is to make normative judgments over what is practical. One of Germany's senators said that "Tuition fees are socially unjust," citing this as a major reason to move ahead with the policy. Only time will tell if Germany's investment into its capital and labor for the future will be effective enough to outweigh the severe cons that come with a third-party payment system. ESR

This is Jonathan Chang's first contribution to Enter Stage Right. © 2014






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